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TRANSCAT INC - Quarter Report: 2022 December (Form 10-Q)

trns20221224b_10q.htm
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

 

FORM 10-Q

(Mark one)

☑  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: December 24, 2022

 

or

 

☐  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                    to                  

Commission File Number: 000-03905         

 

TRANSCAT, INC.

(Exact name of registrant as specified in its charter)

 

Ohio

16-0874418

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

35 Vantage Point Drive, Rochester, New York 14624

(Address of principal executive offices) (Zip Code)

 

(585) 352-7777

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.50 par value

TRNS

Nasdaq Global Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☑   No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☑   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐   No ☑

 

The number of shares of common stock, par value $0.50 per share, of the registrant outstanding as of January 27, 2023 was 7,561,512.

 

 

 
   

Page(s)

PART I.

FINANCIAL INFORMATION

 
     

Item 1.

Consolidated Financial Statements:

 
     
 

Statements of Income for the Third Quarter and Nine Months Ended December 24, 2022 and December 25, 2021

1

     
 

Statements of Comprehensive Income for the Third Quarter and Nine Months Ended December 24, 2022 and December 25, 2021

2

     
 

Balance Sheets as of December 24, 2022 and March 26, 2022

3

     
 

Statements of Cash Flows for the Nine Months Ended December 24, 2022 and December 25, 2021

4

     
 

Statements of Changes in Shareholders’ Equity for the Third Quarter and Nine Months Ended December 24, 2022 and December 25, 2021

5

     
 

Notes to Consolidated Financial Statements

6

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

     

Item 4.

Controls and Procedures

32

     

PART II.

OTHER INFORMATION

 
     

Item 6.

Exhibits

33

     

SIGNATURES

34

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

 

  

(Unaudited)

  

(Unaudited)

 
  

Third Quarter Ended

  

Nine Months Ended

 
  

December 24,

  

December 25,

  

December 24,

  

December 25,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Service Revenue

 $35,977  $30,237  $105,120  $87,338 

Distribution Sales

  21,425   20,665   63,382   61,741 

Total Revenue

  57,402   50,902   168,502   149,079 
                 

Cost of Service Revenue

  25,184   21,254   72,005   59,891 

Cost of Distribution Sales

  15,818   16,012   47,292   47,421 

Total Cost of Revenue

  41,002   37,266   119,297   107,312 
                 

Gross Profit

  16,400   13,636   49,205   41,767 
                 

Selling, Marketing and Warehouse Expenses

  6,595   5,051   18,315   15,022 

General and Administrative Expenses

  6,642   6,224   20,497   17,117 

Total Operating Expenses

  13,237   11,275   38,812   32,139 
                 

Operating Income

  3,163   2,361   10,393   9,628 
                 

Interest and Other Expense, net

  1,039   136   1,732   581 
                 

Income Before Income Taxes

  2,124   2,225   8,661   9,047 

Provision for Income Taxes

  523   596   1,631   715 
                 

Net Income

 $1,601  $1,629  $7,030  $8,332 
                 

Basic Earnings Per Share

 $0.21  $0.22  $0.93  $1.11 

Average Shares Outstanding

  7,559   7,519   7,547   7,487 
                 

Diluted Earnings Per Share

 $0.21  $0.21  $0.92  $1.10 

Average Shares Outstanding

  7,666   7,653   7,644   7,599 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

 

  

(Unaudited)

  

(Unaudited)

 
  

Third Quarter Ended

  

Nine Months Ended

 
  

December 24,

  

December 25,

  

December 24,

  

December 25,

 
  

2022

  

2021

  

2022

  

2021

 

Net Income

 $1,601  $1,629  $7,030  $8,332 
                 

Other Comprehensive Income (Loss):

                

Currency Translation Adjustment

  393   (233)  (878)  (314)

Other, net of tax effects of $2 and $7 for the third quarter ended December 24, 2022 and December 25, 2021, respectively; and $(4) and $17 for the nine months ended December 24, 2022 and December 25, 2021, respectively

  8   18   (12)  48 

Total Other Comprehensive Income (Loss)

  401   (215)  (890)  (266)
                 

Comprehensive Income

 $2,002  $1,414  $6,140  $8,066 

 

See accompanying notes to consolidated financial statements.

 

 

 

TRANSCAT, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

 

  

(Unaudited)

  

(Audited)

 
  

December 24,

  

March 26,

 
  

2022

  

2022

 

ASSETS

        

Current Assets:

        

Cash

 $1,593  $1,396 

Accounts Receivable, less allowance for doubtful accounts of $488 and $460 as of December 24, 2022 and March 26, 2022, respectively

  37,702   39,737 

Other Receivables

  377   558 

Inventory, net

  16,884   12,712 

Prepaid Expenses and Other Current Assets

  4,141   5,301 

Total Current Assets

  60,697   59,704 

Property and Equipment, net

  28,334   26,439 

Goodwill

  68,826   65,074 

Intangible Assets, net

  14,843   14,692 

Right To Use Assets, net

  14,874   11,026 

Other Assets

  895   827 

Total Assets

 $188,469  $177,762 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

        

Current Liabilities:

        

Accounts Payable

 $13,845  $14,171 

Accrued Compensation and Other Current Liabilities

  9,012   11,378 

Current Portion of Long-Term Debt

  2,227   2,161 

Total Current Liabilities

  25,084   27,710 

Long-Term Debt

  46,941   46,291 

Deferred Tax Liabilities, net

  6,672   6,724 

Lease Liabilities

  12,998   9,194 

Other Liabilities

  1,490   1,667 

Total Liabilities

  93,185   91,586 
         

Shareholders' Equity:

        

Common Stock, par value $0.50 per share, 30,000,000 shares authorized; 7,560,420 and 7,529,078 shares issued and outstanding as of December 24, 2022 and March 26, 2022, respectively

  3,780   3,765 

Capital in Excess of Par Value

  27,123   23,900 

Accumulated Other Comprehensive Loss

  (1,123)  (233)

Retained Earnings

  65,504   58,744 

Total Shareholders' Equity

  95,284   86,176 

Total Liabilities and Shareholders' Equity

 $188,469  $177,762 

 

See accompanying notes to consolidated financial statements.

 

 

 

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

   

(Unaudited)

 
   

Nine Months Ended

 
   

December 24,

   

December 25,

 
   

2022

   

2021

 

Cash Flows from Operating Activities:

               

Net Income

  $ 7,030     $ 8,332  

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

               

Net Loss on Disposal of Property and Equipment

    62       113  

Deferred Income Taxes

    (52 )     5  

Depreciation and Amortization

    8,243       6,899  

Provision for Accounts Receivable and Inventory Reserves

    174       417  

Stock-Based Compensation Expense

    2,757       1,681  

Changes in Assets and Liabilities, net of acquisitions:

               

Accounts Receivable and Other Receivables

    1,850       1,185  

Inventory

    (3,589 )     (1,794 )

Prepaid Expenses and Other Current Assets

    1,074       (3,280 )

Accounts Payable

    (424 )     689  

Accrued Compensation and Other Current Liabilities

    (3,150 )     (1,470 )

Income Taxes Payable

    -       (399 )

Net Cash Provided by Operating Activities

    13,975       12,378  
                 

Cash Flows from Investing Activities:

               

Purchases of Property and Equipment

    (7,149 )     (5,861 )

Proceeds from Sale of Property and Equipment

    10       12  

Business Acquisitions, net of cash acquired

    (8,306 )     (20,910 )

Net Cash Used in Investing Activities

    (15,445 )     (26,759 )
                 

Cash Flows from Financing Activities:

               

Proceeds from Revolving Credit Facility, net

    2,286       22,760  

Repayments of Term Loan

    (1,570 )     (1,565 )

Issuance of Common Stock

    503       1,354  

Repurchase of Common Stock

    (437 )     (5,649 )

Net Cash Provided by Financing Activities

    782       16,900  
                 

Effect of Exchange Rate Changes on Cash

    885       (300 )
                 

Net Increase in Cash

    197       2,219  

Cash at Beginning of Period

    1,396       560  

Cash at End of Period

  $ 1,593     $ 2,779  
                 

Supplemental Disclosure of Cash Flow Activity:

               

Cash paid during the period for:

               

Interest

  $ 1,510     $ 531  

Income Taxes, net

  $ 957     $ 3,263  

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

               

Common stock issued for acquisitions

  $ 145     $ 2,368  

Assets acquired and liabilities assumed in business combinations:

               

Accrued contingent consideration related to NEXA acquisition

  $ -     $ 153  

Accrued holdback consideration related to Alliance acquisition

  $ 518     $ -  

 

See accompanying notes to consolidated financial statements.

 

 

 

TRANSCAT, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(In Thousands, Except Par Value Amounts)

(Unaudited)

 

                   

Capital

                         
   

Common Stock

   

In

   

Accumulated

                 
   

Issued

   

Excess

   

Other

                 
   

$0.50 Par Value

   

of Par

   

Comprehensive

   

Retained

         
   

Shares

   

Amount

   

Value

   

Income (Loss)

   

Earnings

   

Total

 

Balance as of March 27, 2021

    7,458     $ 3,729     $ 19,287     $ (451 )   $ 52,513     $ 75,078  

Issuance of Common Stock

    52       26       673       -       -       699  

Repurchase of Common Stock

    (62 )     (31 )     (755 )     -       (2,591 )     (3,377 )

Stock-Based Compensation

    21       10       427       -       -       437  

Other Comprehensive Income

    -       -       -       182       -       182  

Net Income

    -       -       -       -       3,688       3,688  

Balance as of June 26, 2021

    7,469     $ 3,734     $ 19,632     $ (269 )   $ 53,610     $ 76,707  

Issuance of Common Stock

    72       36       2,871       -       -       2,907  

Repurchase of Common Stock

    (35 )     (18 )     (403 )     -       (1,851 )     (2,272 )

Stock-Based Compensation

    12       7       613       -       -       620  

Other Comprehensive Loss

    -       -       -       (233 )     -       (233 )

Net Income

    -       -       -       -       3,015       3,015  

Balance as of September 25, 2021

    7,518     $ 3,759     $ 22,713     $ (502 )   $ 54,774     $ 80,744  

Issuance of Common Stock

    2       1       115       -       -       116  

Stock-Based Compensation

    1       -       624       -       -       624  

Other Comprehensive Loss

    -       -       -       (215 )     -       (215 )

Net Income

    -       -       -       -       1,629       1,629  

Balance as of December 25, 2021

    7,521     $ 3,760     $ 23,452     $ (717 )   $ 56,403     $ 82,898  

 

                   

Capital

                         
   

Common Stock

   

In

   

Accumulated

                 
   

Issued

   

Excess

   

Other

                 
   

$0.50 Par Value

   

of Par

   

Comprehensive

   

Retained

         
   

Shares

   

Amount

   

Value

   

Income (Loss)

   

Earnings

   

Total

 

Balance as of March 26, 2022

    7,529     $ 3,765     $ 23,900     $ (233 )   $ 58,744     $ 86,176  

Issuance of Common Stock

    8       3       363       -       -       366  

Repurchase of Common Stock

    (7 )     (3 )     (164 )     -       (270 )     (437 )

Stock-Based Compensation

    16       8       820       -       -       828  

Other Comprehensive Loss

    -       -       -       (453 )     -       (453 )

Net Income

    -       -       -       -       3,072       3,072  

Balance as of June 25, 2022

    7,546     $ 3,773     $ 24,919     $ (686 )   $ 61,546     $ 89,552  

Issuance of Common Stock

    3       2       141       -       -       143  

Stock-Based Compensation

    9       4       1,110       -       -       1,114  

Other Comprehensive Loss

    -       -       -       (838 )     -       (838 )

Net Income

    -       -       -       -       2,357       2,357  

Balance as of September 24, 2022

    7,558     $ 3,779     $ 26,170     $ (1,524 )   $ 63,903     $ 92,328  

Issuance of Common Stock

    1       -       139       -       -       139  

Stock-Based Compensation

    1       1       814       -       -       815  

Other Comprehensive Income

    -       -       -       401       -       401  

Net Income

    -       -       -       -       1,601       1,601  

Balance as of December 24, 2022

    7,560     $ 3,780     $ 27,123     $ (1,123 )   $ 65,504     $ 95,284  

 

See accompanying notes to consolidated financial statements.

 

 

TRANSCAT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1 GENERAL

 

Description of Business: Transcat, Inc. (“Transcat,” “we,” “us,” “our” or the “Company”) is a leading provider of accredited calibration services, enterprise asset management services, and value-added distributor of professional grade handheld test, measurement and control instrumentation. The Company is focused on providing services and products to highly regulated industries, particularly the life science industry, which includes pharmaceutical, biotechnology, medical device and other FDA-regulated businesses. Additional industries served include industrial manufacturing; energy and utilities, including oil and gas; chemical manufacturing; FAA-regulated businesses, including aerospace and defense and other industries that require accuracy in their processes, confirmation of the capabilities of their equipment, and for which the risk of failure is very costly.

 

Basis of Presentation: Transcat’s unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation (consisting of normal recurring adjustments) have been included. The results for the interim periods are not necessarily indicative of what the results will be for the fiscal year. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements as of and for the fiscal year ended  March 26, 2022 (“fiscal year 2022”) contained in the Company’s Annual Report on Form 10-K for fiscal year 2022 filed with the SEC.

 

Revenue Recognition: Distribution sales are recorded when an order’s title and risk of loss transfers to the customer, which is generally upon shipment. The Company recognizes the majority of its Service revenue based upon when the calibration or other activity is performed and then shipped and/or delivered to the customer. The majority of the Company’s revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and/or our obligation has been fulfilled. Some Service revenue is generated from managing customers’ calibration programs in which the Company recognizes revenue over time using the output method-time elapsed as this portrays the transfer of control to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for product shipped or services performed. Sales taxes and other taxes billed and collected from customers are excluded from revenue. The Company generally invoices its customers for freight, shipping, and handling charges. Freight billed to customers is included in revenue. Shipping and handling is not included in revenue. Provisions for customer returns are provided for in the period the related revenue is recorded based upon historical data.

 

Under Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, we use judgments that could potentially impact both the timing of our satisfaction of performance obligations and our determination of transaction prices used in determining revenue recognized. Such judgments include considerations in determining our transaction prices and when our performance obligations are satisfied for our standard product sales that include general payment terms that are between net 30 and 90 days.

 

Revenue recognized from prior period performance obligations for the third quarter of the fiscal year ending March 25, 2023 (“fiscal year 2023”) was immaterial. As of December 24, 2022, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606, the Company applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations. Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of December 24, 2022 and March 26, 2022 were immaterial. See Note 4 for disaggregated revenue information.

 

Fair Value of Financial Instruments: Transcat has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value due to variable interest rate pricing on a portion of the debt with the balance bearing an interest rate approximating current market rates, and the carrying amounts for cash, accounts receivable and accounts payable approximate fair value due to their short-term nature. Investment assets, which fund the Company’s non-qualified deferred compensation plan, consist of mutual funds and are valued based on Level 1 inputs. At each of December 24, 2022 and March 26, 2022, investment assets totaled $0.2 million, and are included as a component of other assets (non-current) on the Consolidated Balance Sheets.

 

6

 

Stock-Based Compensation: The Company measures the cost of services received in exchange for all equity awards granted, including stock options and restricted stock units, based on the fair market value of the award as of the grant date. The Company records compensation cost related to unvested equity awards by recognizing, on a straight-line basis, the unamortized grant date fair value over the remaining service period of each award. Excess tax benefits for share-based award activity are reflected in the Consolidated Statements of Income as a component of the provision for income taxes. Excess tax benefits are realized benefits from tax deductions for exercised awards in excess of the deferred tax asset attributable to stock-based compensation costs for such awards. The Company did not capitalize any stock-based compensation costs as part of an asset. The Company estimates forfeiture rates based on its historical experience. During the first nine months of fiscal year 2023 and fiscal year 2022, the Company recorded non-cash stock-based compensation expense of $2.8 million and $1.7 million, respectively, in the Consolidated Statements of Income.

 

Foreign Currency Translation and Transactions: The accounts of Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management), an Irish company, Galium Limited (d/b/a Complete Calibrations), an Irish company, and Transcat Canada Inc., all of which are wholly-owned subsidiaries of the Company, are maintained in the local currencies, the Euro, Euro and Canadian dollar, respectively, and have been translated to U.S. dollars. Accordingly, the amounts representing assets and liabilities have been translated at the period-end rates of exchange and related revenue and expense accounts have been translated at an average rate of exchange during the period. Gains and losses arising from translation of Cal OpEx Limited’s, Galium Limited's and Transcat Canada Inc.’s financial statements into U.S. dollars are recorded directly to the accumulated other comprehensive loss component of shareholders’ equity.

 

Transcat records foreign currency gains and losses on business transactions denominated in foreign currency. The net foreign currency loss was less than $0.1 million in each of the first nine months of fiscal year 2023 and fiscal year 2022. The Company continually utilizes short-term foreign exchange forward contracts to reduce the risk that its future earnings denominated in Canadian dollars would be adversely affected by changes in currency exchange rates. The Company does not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a gain of $0.3 million and less than $0.1 million during the first nine months of fiscal years 2023 and 2022, respectively, was recognized as a component of Interest and Other Expenses, net in the Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On December 24, 2022, the Company had a foreign exchange contract, which matured in January 2023, outstanding in the notional amount of $3.0 million. This contract was subsequently renewed and remains in place. The Company does not use hedging arrangements for speculative purposes.

 

Earnings Per Share: Basic earnings per share of common stock is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share of common stock reflect the assumed conversion of stock options and unvested restricted stock units using the treasury stock method in periods in which they have a dilutive effect. In computing the per share effect of assumed conversion, proceeds received from the exercise of options and unvested restricted stock units are considered to have been used to purchase shares of common stock at the average market prices during the period, and the resulting net additional shares of common stock are included in the calculation of average shares of common stock outstanding.

 

For the third quarter of fiscal year 2023, the net additional common stock equivalents had no effect on the calculation of diluted earnings per share. For the third quarter of fiscal year 2022, the net additional common stock equivalents had a ($0.01) effect on the calculation of diluted earnings per share. For the first nine months of fiscal year 2023, and fiscal year 2022, the net additional common stock equivalents had a ($0.01) effect on the calculation of diluted earnings per share. The average shares outstanding used to compute basic and diluted earnings per share are as follows (amounts in thousands):

 

  

Third Quarter Ended

  

Nine Months Ended

 
  

December 24,

  

December 25,

  

December 24,

  

December 25,

 
  

2022

  

2021

  

2022

  

2021

 

Average Shares Outstanding – Basic

  7,559   7,519   7,547   7,487 

Effect of Dilutive Common Stock Equivalents

  107   134   97   112 

Average Shares Outstanding – Diluted

  7,666   7,653   7,644   7,599 

Anti-dilutive Common Stock Equivalents

  148   -   163   100 

 

7

 

Goodwill and Intangible Assets: Goodwill represents the excess of the purchase price over the fair values of the underlying net assets of an acquired business. The Company tests goodwill for impairment for each reporting unit on an annual basis during the fourth quarter of its fiscal year, or immediately if conditions indicate that such impairment could exist. The Company is permitted, but not required, to qualitatively assess indicators of a reporting unit’s fair value to determine whether it is necessary to perform the two-step goodwill impairment test. If a quantitative test is deemed necessary, a discounted cash flow analysis is prepared to estimate fair value.

 

Intangible assets, namely customer base and covenants not to compete, represent an allocation of purchase price to identifiable intangible assets of an acquired business. Intangible assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. A summary of changes in the Company’s goodwill and intangible assets is as follows (amounts in thousands):

 

  

Goodwill

  

Intangible Assets

 
  

Distribution

  

Service

  

Total

  

Distribution

  

Service

  

Total

 

Net Book Value as of March 26, 2022

 $11,458  $53,616  $65,074  $647  $14,045  $14,692 

Additions

  -   4,496   4,496   -   3,576   3,576 

Measurement Period Adjustments

  -   (203)  (203)  -   -   - 

Amortization

  -   -   -   (152)  (3,259)  (3,411)

Currency Translation Adjustment

  -   (541)  (541)  -   (14)  (14)

Net Book Value as of December 24, 2022

 $11,458  $57,368  $68,826  $495  $14,348  $14,843 

 

Recently Issued Accounting Pronouncements: In June 2016, the Financial Accounting Standard Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The ASU replaces the "incurred loss" model with an "expected credit loss" model that requires entities to estimate an expected lifetime credit loss on financial assets, including trade accounts receivable. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Allowance for doubtful accounts is the most significant item for the Company under this ASU. As credit losses from the Company's trade receivables have not historically been significant, the Company anticipates that the adoption of the ASU will not have a material impact on its consolidated financial statements.

 

 

NOTE 2 LONG-TERM DEBT

 

On July 7, 2021, we entered into the Second Amended and Restated Credit Facility Agreement (the “2021 Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), that amended and restated in its entirety the Company’s Amended and Restated Credit Facility Agreement dated as of October 30, 2017, as amended by Amended and Restated Credit Facility Agreement Amendment 1 dated December 10, 2018 and Amended and Restated Credit Facility Agreement Amendment 2 (“Amendment Two”) dated May 18, 2020 (as amended, the “Prior Credit Agreement”).

 

The 2021 Credit Agreement increased the revolving credit commitment (the “Revolving Credit Commitment”) from $40.0 million to $80.0 million, with a letter of credit subfacility increased from $2.0 million to $10.0 million, and extended the term of the Revolving Credit Commitment to June 2026. The 2021 Credit Agreement amended the definition of Applicable Margin (formerly Applicable Rate under the Prior Credit Agreement), which is based upon the Company’s then current leverage ratio and is used to determine interest charges on outstanding and unused borrowings under the revolving credit facility; the amendments reduced the Applicable Margins payable at the two highest leverage ratio levels. The 2021 Credit Agreement also amended the definition of Permitted Acquisitions, that is, acquisitions which are permitted under, and may be financed with proceeds of, the revolving credit facility, including increasing the aggregate purchase price for acquisitions consummated in any fiscal year from $1.0 million to $65.0 million during fiscal year 2022 and $50.0 million during any subsequent fiscal year, and adding an aggregate purchase price of $40.0 million for acquisitions consummated at any time during the term of the 2021 Credit Agreement related to businesses with a principal place of business located in the United Kingdom or the European Union.

 

8

 

In addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $25.0 million (increased from $10.0 million in the Prior Credit Agreement) in the aggregate and $10.0 million (increased from $3.0 million in the Prior Credit Agreement) in any single fiscal year may be used by us to repurchase our shares and pay dividends. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply. The 2021 Credit Agreement also reduced the London Interbank Offered Rate (“LIBOR”) floor from 1.0% to 0.25% and included a mechanism for adoption of a different benchmark rate upon the discontinuation of LIBOR. The 2021 Credit Agreement also reduced the fixed interest rate on our term loan in the amount of $15.0 million (the “2018 Term Loan”) was reduced from 4.15% to 3.90%.

 

The 2021 Credit Agreement superseded in its entirety, the Prior Credit Agreement. Amendment Two to the Prior Credit Agreement had previously extended the term of the revolving credit facility to October 20, 2022 and increased the revolving credit commitment to $40.0 million.

 

Amendment Two had modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two had amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to the Company’s ability to repurchase its shares and pay dividends. Amendment Two also had modified the leverage ratio and fixed charge coverage ratio covenants with which the Company was required to comply and limited capital expenditures to $5.5 million for fiscal year 2021. Amendment Two also had established a LIBOR floor of 1.0% and included a mechanism for adoption of a different benchmark rate in the event LIBOR was discontinued.

 

As of December 24, 2022, $80.0 million was available under the revolving credit facility, of which $42.2 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first nine months of fiscal year 2023, $8.3 million was used for three business acquisitions.

 

As of December 24, 2022, $7.0 million was outstanding on the 2018 Term Loan, of which $2.2 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025.

 

Interest and Other Costs: Interest on outstanding borrowings under the revolving credit facility accrue, at Transcat’s election, at either the variable one-month LIBOR or a fixed rate for a designated period at the LIBOR corresponding to such period (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods), in each case, plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrued at a fixed rate of 4.15% during the first quarter of fiscal year 2022 and accrued at a fixed rate of 3.90% during the second quarter of fiscal year 2022 and accrues at a fixed rate of 3.90% over the term of the loan for subsequent periods. Unused fees accrue based on the average daily amount of unused credit available on the revolving credit facility. Interest rate margins and unused fees are determined on a quarterly basis based upon the Company’s calculated leverage ratio. The Company’s interest rate for the revolving credit facility for the first nine months of fiscal year 2023 ranged from 1.6% to 6.0%.

 

Covenants: The 2021 Credit Agreement has certain covenants with which the Company must comply, including a fixed charge ratio covenant and a leverage ratio covenant. The Company was in compliance with all loan covenants and requirements during the third quarter of fiscal year 2023. Our leverage ratio, as defined in the 2021 Credit Agreement, was 1.66 at December 24, 2022, compared with 1.74 at March 26, 2022.

 

Pursuant to the Prior Credit Agreement, we were required to comply with a fixed charge ratio covenant and a leverage ratio covenant, which were modified by the 2021 Credit Agreement. The allowable leverage ratio under the Prior Credit Agreement for the first quarter of fiscal year 2022 was a maximum multiple of 4.0 of total debt outstanding compared to EBITDA and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. The Prior Credit Agreement also had provided that the trailing twelve-month pro forma EBITDA of an acquired business was included in the allowable leverage calculation. After the first quarter of fiscal year 2022, pursuant to the 2021 Credit Agreement, the allowable leverage ratio is a maximum multiple of 3.0.

 

Other Terms: The Company has pledged all of its U.S. tangible and intangible personal property, the equity interests of its U.S.-based subsidiaries, and a majority of the common stock of Transcat Canada Inc. as collateral security for the loans made under the revolving credit facility.

 

9

 
 

NOTE 3 STOCK-BASED COMPENSATION

 

In September 2021, the Transcat, Inc. 2021 Stock Incentive Plan (the “2021 Plan”) was approved by shareholders and became effective. The 2021 Plan replaced the Transcat, Inc. 2003 Incentive Plan (the “2003 Plan”). Shares available for grant under the 2021 Plan include any shares remaining available for issuance under the 2003 Plan and any shares that are subject to outstanding awards under the 2003 Plan that are subsequently canceled, expired, forfeited, or otherwise not issued or are settled in cash. The 2021 Plan provides for, among other awards, grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant. At December 24, 2022, 0.7 million shares of common stock were available for future grant under the 2021 Plan.

 

The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete tax benefits related to share-based compensation and stock option activity during the first nine months of fiscal year 2023 and fiscal year 2022 were $0.5 million and $1.7 million, respectively.

 

Restricted Stock Units: The Company grants time-based and performance-based restricted stock units as a component of executive and key employee compensation. Expense for restricted stock unit grants is recognized on a straight-line basis for the service period of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock unit grants is the quoted market price for the Company’s common stock on the date of grant. These restricted stock units are either time vested, or vest following the third fiscal year from the date of grant subject to cumulative diluted earnings per share targets over the eligible period.

 

Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unit that coincides with the actual outcome of the performance conditions. On an interim basis, the Company records compensation cost based on the estimated level of achievement of the performance conditions. The expense relating to the time vested restricted stock units is recognized on a straight-line basis over the requisite service period for the entire award.

 

The Company achieved 82% of the target level for the performance-based restricted stock units granted in the fiscal year ended March 28, 2020 and as a result, issued 16 thousand shares of common stock to executive officers and certain key employees during the first quarter of fiscal year 2023. The following table summarizes the non-vested restricted stock units outstanding as of December 24, 2022 (in thousands, except per unit data):

 

    

Total

  

Grant Date

 

Estimated

    

Number

  

Fair

 

Level of

Date

 

Measurement

 

of Units

  

Value

 

Achievement at

Granted

 

Period

 

Outstanding

  

Per Unit

 

December 24, 2022

October 2018

 

October 2018 – September 2027

 6  $20.81 

Time Vested

April 2020

 

April 2020 – March 2023

 2  $26.25 

Time Vested

July 2020

 

July 2020 – July 2023

 26  $27.08 

Time Vested

September 2020

 

September 2020 – July 2023

 4  $28.54 

Time Vested

September 2020

 

September 2020 – July 2023

 5  $29.76 

Time Vested

September 2020

 

September 2020 – September 2023

 3  $29.76 

Time Vested

January 2021

 

January 2021 – January 2024

 1  $34.62 

Time Vested

May 2021

 

May 2021 – May 2024

 1  $54.21 

Time Vested

June 2021

 

June 2021 – March 2024

 10  $53.17 

150% of target level

June 2021

 

June 2021 – March 2024

 11  $53.17 

Time Vested

September 2021

 

September 2021 – September 2024

 4  $67.76 

Time Vested

December 2021

 

December 2021 – December 2024

 1  $90.41 

Time Vested

January 2022

 

January 2022 – March 2024

 2  $90.92 

Time Vested

March 2022

 

March 2022 – March 2025

 2  $76.31 

Time Vested

May 2022

 

May 2022-March 2025

 12  $63.17 

100% of target level

May 2022

 

May 2022-March 2025

 11  $63.17 

Time Vested

August 2022

 

August 2022-August 2025

 1  $78.04 

Time Vested

December 2022

 

December 2022 -December 2025

 1  $81.26 

Time Vested

December 2022

 

December 2022 - December 2025

 1  $67.48 

Time Vested

September 2022

 

September 2022-September 2023

 5  $73.80 

Time Vested

 

10

 

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $1.7 million and $1.2 million in the first nine months of fiscal year 2023 and fiscal year 2022, respectively. As of December 24, 2022, unearned compensation, to be recognized over the grants’ respective service periods, totaled $2.7 million.

 

Stock Options: The Company grants stock options to employees and directors with an exercise price equal to the quoted market price of the Company’s stock at the date of the grant. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-line basis over the requisite service period for each award. Options vest either immediately or over a period of up to five years using a straight-line basis and expire either five years or ten years from the date of grant.

 

We calculate the fair value of the stock options granted using the Black-Scholes model. There were no stock options granted during the three months ended December 24, 2022 and December 25, 2021.  The following weighted-average assumptions were used to value options granted during the first nine months of fiscal year 2023 and fiscal year 2022:

 

  

Nine Months Ended

 
  

December 24,

  

December 25,

 
  

2022

  

2021

 
         

Risk-Free Interest Rate

  2.65%  1.00%

Volatility Factor

  37.62%  29.95%

Expected Term (in Years)

  4.58   6.38 

Annual Dividend Rate

  0.00%  0.00%

 

We calculate expected volatility for stock options by taking an average of historical volatility over the expected term. The computation of expected term was determined based on safe harbor rules, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of grant. We assume no expected dividends. Under FASB ASC Topic 718, “Compensation – Stock Compensation”, the Company has elected to account for forfeitures as they occur.

 

During the first nine months of fiscal year 2023, the Company granted options for 46,000 shares of common stock in the aggregate to Company employees that vest over three years and an option for 10,000 shares of common stock to a Board of Directors member that vests over five years.

 

During the first nine months of fiscal year 2022, the Company granted options for 25,000 shares of common stock in the aggregate to Company employees that vest over three to five years, an option for 2,000 shares of common stock each to five employees (10,000 shares in the aggregate) that vests over three years and options for 90,000 shares of common stock in the aggregate to Company employees that vest over five years.

 

The expense related to all stock option awards was $1.1 million in the first nine months of fiscal year 2023 and $0.4 million in the first nine months of fiscal year 2022.

 

11

 

The following table summarizes the Company’s options as of and for the first nine months ended December 24, 2022 (in thousands, except price per option data and years):

 

      

Weighted

  

Weighted

     
      

Average

  

Average

     
  

Number

  

Exercise

  

Remaining

  

Aggregate

 
  

Of

  

Price Per

  

Contractual

  

Intrinsic

 
  

Options

  

Option

  

Term (in years)

  

Value

 

Outstanding as of March 26, 2022

  165  $53.27         

Granted

  56  $62.46         

Exercised

  (4) $6.19         

Forfeited

  -  $-         

Outstanding as of December 24, 2022

  217  $56.25   7  $2,980 

Exercisable as of December 24, 2022

  28  $53.76   9  $454 

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the third quarter of fiscal year 2023 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all holders exercised their options on December 24, 2022. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

 

Total unrecognized compensation cost related to non-vested stock options as of December 24, 2022 was $2.2 million, which is expected to be recognized over a period of three years. The aggregate intrinsic value of stock options exercised during the first nine months of fiscal year 2023 and fiscal year 2022 was $0.2 million and $6.9 million, respectively. Cash received from the exercise of options in the first nine months of fiscal year 2023 and fiscal year 2022 was less than $0.1 million and $1.0 million, respectively.

 

12

 
 

NOTE 4 SEGMENT INFORMATION

 

The basis for determining our operating segments is the manner in which financial information is used in monitoring our operations. Transcat has two reportable segments: Service and Distribution. Through our Service segment, we offer calibration, repair, inspection, analytical qualifications, preventative maintenance, consulting and other related services. Through our Distribution segment, we sell and rent national and proprietary brand instruments to customers globally. The Company has no inter-segment sales. We believe that reporting performance at the operating income level is the best indicator of segment performance. The following table presents segment and geographic data for the third quarter and first nine months of fiscal year 2023 and fiscal year 2022 (dollars in thousands):

 

   

Third Quarter Ended

   

Nine Months Ended

 
   

December 24,

   

December 25,

   

December 24,

   

December 25,

 
   

2022

   

2021

   

2022

   

2021

 

Revenue:

                               

Service

  $ 35,977     $ 30,237     $ 105,120     $ 87,338  

Distribution

    21,425       20,665       63,382       61,741  

Total

    57,402       50,902       168,502       149,079  
                                 

Gross Profit:

                               

Service

    10,793       8,983       33,115       27,447  

Distribution

    5,607       4,653       16,090       14,320  

Total

    16,400       13,636       49,205       41,767  
                                 

Operating Expenses:

                               

Service (1)

    8,957       7,322       26,240       20,165  

Distribution (1)

    4,280       3,953       12,572       11,974  

Total

    13,237       11,275       38,812       32,139  
                                 

Operating Income:

                               

Service

    1,836       1,661       6,875       7,282  

Distribution

    1,327       700       3,518       2,346  

Total

    3,163       2,361       10,393       9,628  
                                 

Unallocated Amounts:

                               

Interest and Other Expense, net

    1,039       136       1,732       581  

Provision for Income Taxes

    523       596       1,631       715  

Total

    1,562       732       3,363       1,296  
                                 

Net Income

  $ 1,601     $ 1,629     $ 7,030     $ 8,332  
                                 

Geographic Data:

                               

Revenues to Unaffiliated Customers (2)

                               

United States (3)

  $ 51,209     $ 46,005     $ 151,242     $ 136,359  

Canada

    4,221       3,749       12,075       10,849  

Other International

    1,972       1,148       5,185       1,871  

Total

  $ 57,402     $ 50,902     $ 168,502     $ 149,079  

 

(1)

Operating expense allocations between segments are based on actual amounts, a percentage of revenues, headcount, and management’s estimates.

(2)

Revenues to unaffiliated customers are attributed to the countries based on the destination of a product shipment or the location where service is rendered.

(3)

United States includes Puerto Rico.

 

13

 
 

NOTE 5 BUSINESS ACQUISITIONS

 

Complete Calibrations: Effective September 28, 2022, Transcat purchased all of the outstanding capital stock of Galium Limited (d/b/a Complete Calibrations) ("Complete Calibrations"), an Irish company.  This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. 

 

All the goodwill related to the Complete Calibrations acquisition has been allocated to the Service segment. Amortization of goodwill related to the Complete Calibrations acquisition is not deductible for tax purposes.  The goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition.

 

The total purchase price paid for Complete Calibrations was approximately $1.2 million in cash.  In connection with this transaction, the Company also entered into a Technology License Agreement with Calibration Robots Limited, an Irish company and related party to Complete Calibrations, for the use of their proprietary robotics in completing calibrations.  The Technology License Agreement includes transactional royalties in the amount of 3 Euros ($3) per calibration performed by technology covered under this license agreement, with a royalty term of up to ten years commencing from the earlier of (i) the date on which cumulative revenue earned from technology covered under this license agreement equals 0.75 million Euros ($0.80 million), and (ii) March 28, 2024.  In addition to the transactional royalties, as long as a key employee is employed by the Company, there is an annual royalty fee of 0.1 million Euros ($0.1 million).  For purposes of this paragraph, we used a conversion rate of 1.0617 to convert Euro to U.S. dollar as of December 24, 2022.

 

The purchase price allocation is subject to revision based upon our final review of assets acquired, and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Complete Calibrations’ assets and liabilities acquired on September 28, 2022 (in thousands):

 

Goodwill

 $1,123 

Plus:

Cash

  10 
 

Inventory

  44 

Total Purchase Price

 $1,177 

 

From the date of acquisition, Complete Calibrations has contributed revenue of $0.1 million and operating income of less than $0.1 million.

 

e2b: Effective September 27, 2022, Transcat acquired substantially all of the assets of e2b Calibration (“e2b”), an Ohio based provider of calibration services.  This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities. 

 

The e2b goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the e2b acquisition has been allocated to the Service segment. Intangible assets related to the e2b acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the e2b acquisition is deductible for tax purposes.

 

The total purchase price paid for the assets of e2b was approximately $3.1 million in cash.  Pursuant to the asset purchase agreement, the Company has $0.9 million of the purchase price in escrow for certain potential post-closing adjustments.   

 

14

 

The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments, assets acquired, and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of e2b’s assets and liabilities acquired on September 27, 2022 (in thousands):

 

 

Goodwill

 $1,590 

Intangible Assets – Customer Base & Contracts

  746 

Intangible Assets – Covenant Not to Compete

  396 
    2,732 

Plus:

Accounts Receivable

  361 
 

Other Current Assets

  24 
 

Property and Equipment

  103 

Less:

Current Liabilities

  (121)

Total Purchase Price

 $3,099 

 

From the date of acquisition, e2b has contributed revenue of $0.9 million and operating income of $0.2 million, which includes the negative impact of amortization of the acquired intangible assets.

 

Alliance: Effective May 31, 2022, Transcat acquired substantially all of the assets of Charlton Jeffmont Inc., Raitz Inc. and Toolroom Calibration Inc. d/b/a Alliance Calibration (“Alliance”), an Ohio based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s service capabilities.

 

The Alliance goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the Alliance acquisition has been allocated to the Service segment. Intangible assets related to the Alliance acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the Alliance acquisition is deductible for tax purposes.

 

The purchase price for Alliance was approximately $4.7 million and was paid with $4.0 million in cash and the issuance of 2,284 shares of our common stock valued at $0.1 million. Pursuant to the asset purchase agreement, the Company held back $0.5 million of the purchase price for certain potential post-closing adjustments, and the purchase price will be subject to reduction by $0.5 million if a key customer relationship is not retained.

 

The purchase price allocation is subject to revision based upon our final review of intangible asset valuation assumptions, working capital adjustments, assets acquired, and liabilities assumed. The following is a summary of the preliminary purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Alliance’s assets and liabilities acquired on May 31, 2022 (in thousands):

 

Goodwill

$1,783 

Intangible Assets – Customer Base & Contracts

 2,320 

Intangible Assets – Covenant Not to Compete

 114 
   4,217 

Plus:

Accounts Receivable

 343 
 

Property and Equipment

 170 

Less:

Current Liabilities

 (27)

Total Purchase Price

$4,703 

 

From the date of acquisition, Alliance has contributed revenue of $1.3 million and operating income of $0.1 million, which includes the negative impact of amortization of the acquired intangible assets.

 

 

15

 

Tangent: Effective December 31, 2021, Transcat purchased all the outstanding membership units of Tangent Labs, LLC (“Tangent”). Tangent provides in-house and on-site calibrations of precision measurement and control instrumentation to customers in the life science, aerospace and other regulated industries, and has lab locations in Indianapolis, Indiana and Huntsville, Alabama. This transaction aligned with a key component of the Company’s strategy of acquiring local capabilities in attractive geographies.

 

The Tangent goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All the goodwill and intangible assets relating to the Tangent acquisition has been allocated to the Service segment. Intangible assets related to the Tangent acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to fifteen years and are deductible for tax purposes. Amortization of goodwill related to the Tangent acquisition is not deductible for tax purposes.

 

The purchase price for Tangent was approximately $8.9 million, all paid in cash, and is subject to certain customary holdback provisions and a portion of which was placed in escrow to secure the sellers’ obligations in the event that a key employee terminates employment with Tangent on or before the first anniversary of the closing of the transaction.  $7.9 million was paid in cash and $1.0 million of the purchase price has been put into escrow for indemnification claims, if any.

 

During the second quarter of fiscal year 2023, the key employee terminated their employment with the Company.  As a result, the Company took $0.2 million out of the escrow account and it was recorded as a gain in the Company's Consolidated Statement of Income.

 

During the second quarter of fiscal year 2023, a measurement period adjustment was recorded to recognize the fair value of Property and Equipment acquired, with a corresponding reduction to Goodwill. There was no remeasurement period adjustment in the third quarter of fiscal year 2023. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Tangent’s assets and liabilities acquired on December 31, 2021 (in thousands):

 

Goodwill

 $5,385 

Intangible Assets – Customer Base & Contracts

  4,150 

Intangible Assets – Covenant Not to Compete

  220 
    9,755 

Plus:

Cash

  26 
 

Accounts Receivable

  187 
 

Other Current Assets

  16 
 

Property and Equipment

  203 

Less:

Current Liabilities

  (68)
 

Deferred Tax Liability

  (1,195)

Total Purchase Price

 $8,924 

 

During the first nine months of fiscal year 2023, Tangent contributed revenue of $1.7 million and operating loss of less than $0.1 million, which includes the negative impact of amortization of the acquired intangible assets.

 

NEXA: Effective August 31, 2021, Transcat purchased all of the outstanding capital stock of Cal OpEx Limited (d/b/a NEXA Enterprise Asset Management), an Irish company, which owns all of the issued and outstanding capital stock of its U.S.-based subsidiary, Cal OpEx Inc., a Delaware corporation (collectively, “NEXA”). NEXA provides calibration optimization and other technical solutions to improve asset and reliability management programs to pharmaceutical, biotechnology, and medical device companies worldwide. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that expand the depth and breadth of the Company’s Service capabilities.

 

The NEXA goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition. All of the goodwill and intangible assets relating to the NEXA acquisition has been allocated to the Service segment. Intangible assets related to the NEXA acquisition are being amortized for financial reporting purposes on an accelerated basis over the estimated useful life of up to five years and are deductible for tax purposes. Amortization of goodwill related to the NEXA acquisition is not deductible for tax purposes.

 

16

 

The purchase price for NEXA was approximately $26.2 million and was paid with $23.9 million in cash and the issuance of 34,943 shares of our common stock valued at $2.4 million. Additionally, there are potential earn-out payments of up to $7.5 million over the four-year period following the closing of the transaction based upon NEXA achieving certain annual revenue and EBITDA goals. If achieved, the earn-out payments will also be made in shares of common stock unless certain criteria is met for cash payment. As of August 31, 2021 the estimated fair value for the contingent earn-out payments, classified as Level 3 in the fair value hierarchy, was $0.2 million and included in the purchase price allocation below. This amount was calculated using a Geometric Brownian motion distribution that was then used in a Monte Carlo simulation model. Assumptions used in the Monte Carlo simulation model included: 1) weighted-average cost of capital of 6.60%, 2) risk-free interest rate of 0.58%, 3) asset volatility of 20.00%, and 4) forecasted revenue and EBITDA. This contingent consideration is remeasured quarterly. If, as a result of remeasurement, the value of the contingent consideration changes, any charges or income will be included in the Company's Consolidated Statements of Income.  During the second quarter of fiscal year 2023, the Company reduced the contingent consideration down to zero.  As a result of remeasurement, the change was included in the Company’s Consolidated Statements of Income.  There were no remeasurement adjustments during the third quarter of fiscal year 2023. $0.1 million of the purchase price has been put into escrow for indemnification claims, if any.

 

The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of NEXA’s assets and liabilities acquired on August 31, 2021 (in thousands):

 

Goodwill

 $15,679 

Intangible Assets – Customer Base & Contracts

  5,600 

Intangible Assets – Backlog

  490 

Intangible Assets – Covenant Not to Compete

  600 
    22,369 

Plus:

Cash

  3,732 
 

Accounts Receivable

  2,434 
 

Non-Current Assets

  38 

Less:

Current Liabilities

  (572)
 

Deferred Tax Liability

  (1,769)

Total Purchase Price

 $26,232 

 

During the first nine months of fiscal year 2023, NEXA contributed revenue of $9.8 million and operating income of $0.2 million, which includes the negative impact of amortization of the acquired intangible assets.

 

Upstate Metrology: Effective April 29, 2021, Transcat acquired substantially all of the assets of Upstate Metrology Inc. (“Upstate Metrology”), a New York based provider of calibration services. This transaction aligned with a key component of the Company’s acquisition strategy of targeting businesses that can leverage the Company’s already existing operating infrastructure.

 

All the goodwill related to the Upstate Metrology acquisition has been allocated to the Service segment. Amortization of goodwill related to the Upstate Metrology acquisition is deductible for tax purposes.  The goodwill is primarily attributable to the workforce acquired, as well as operational synergies and other intangibles that do not qualify for separate recognition.

 

The total purchase price for the assets of Upstate Metrology was approximately $0.9 million. The following is a summary of the purchase price allocation, in the aggregate, to the fair value, based on Level 3 inputs, of Upstate Metrology’s assets and liabilities acquired on April 29, 2021 (in thousands):

 

Goodwill

 $483 

Plus:

Current Assets

  189 
 

Non-Current Assets

  270 

Less:

Current Liabilities

  (11)

Total Purchase Price

 $931 

 

Since this operation was integrated immediately into our existing operation, Upstate Metrology’s separate operating income in undeterminable.

 

 

17

 

The results of acquired businesses are included in Transcat’s consolidated operating results as of the dates the businesses were acquired. The following unaudited pro forma information presents the Company’s results of operations as if the acquisitions of Complete Calibrations, e2b, Alliance, Tangent, NEXA and Upstate Metrology had occurred at the beginning of fiscal year 2022. The pro forma results do not purport to represent what the Company’s results of operations actually would have been if the transactions had occurred at the beginning of the period presented or what the Company’s operating results will be in future periods.

 

  

(Unaudited)

  

(Unaudited)

 
  

Third Quarter Ended

  

Nine Months Ended

 

(in thousands except per share information)

 

December 24, 2022

  

December 25, 2021

  

December 24, 2022

  

December 25, 2021

 
                 

Total Revenue

 $57,402  $52,760  $170,648  $158,848 

Net Income

 $1,601  $1,648  $7,245  $9,749 

Basic Earnings Per Share

 $0.21  $0.22  $0.96  $1.30 

Diluted Earnings Per Share

 $0.21  $0.22  $0.95  $1.28 

 

Certain of the Company’s acquisition agreements include provisions for contingent consideration and other holdback amounts. The Company accrues for contingent consideration and holdback provisions based on their estimated fair value at the date of acquisition.  There is uncertainty of the fair value measurement from the use of significant unobservable inputs if those inputs reasonably could have been different at the reporting date. Changes in those significant unobservable inputs to a different amount might result in a significantly higher or lower fair value.  As of December 24, 2022, $0.5 million of other holdback amounts unpaid are reflected in current liabilities on the Consolidated Balance Sheets. During the first nine months of fiscal year 2023 and fiscal year 2022, no contingent consideration or other holdback amounts were paid.

 

During the first nine months of fiscal year 2023, acquisition costs of $0.1 million were recorded as incurred as general and administrative expenses in the Consolidated Statements of Income.  During the first nine months of fiscal year 2022, acquisition costs were $0.9 million.

 

18

 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements. This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, estimates, beliefs, assumptions and predictions of future events and are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “seek,” “strategy,” “target,” “could,” “may,” “will,” “would,” and other similar words. Forward-looking statements are not statements of historical fact and thus are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in such forward-looking statements. You should evaluate forward-looking statements in light of important risk factors and uncertainties that may affect our operating and financial results and our ability to achieve our financial objectives. These factors include, but are not limited to, general economic conditions applicable to our business, the impact of the COVID-19 pandemic, inflationary impacts, the highly competitive nature of the industries in which we compete and in the nature of our two business segments, the concentration of Service segment customers in the life science and other regulated and industrial manufacturing industries, tariffs and trade relations, any impairment of our goodwill or intangible assets, cybersecurity risks, the risk of significant disruptions in our information technology systems, our ability to recruit, train and retain quality employees, skilled technicians and senior management, fluctuations in our operating results, competition in the rental market, the volatility of our stock price, our ability to adapt our technology, reliance on our enterprise resource planning system, technology updates, risks related to our acquisition strategy and the integration of the businesses we acquire, volatility in our customers’ industries, changes in vendor rebate programs, supply chain delays or disruptions, the risks related to current and future indebtedness, risks related to our intellectual property, the relatively low trading volume of our common stock, foreign currency rate fluctuations, adverse weather events or other catastrophes or natural disasters, changes in tax rates, and changes in accounting standards, legal requirements and listing standards. These risk factors and uncertainties are more fully described by us under the heading “Risk Factors” in our reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended March 26, 2022. You should not place undue reliance on our forward-looking statements, which speak only as of the date they are made. Except as required by law, we undertake no obligation to update or publicly announce any revisions to any of the forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

There have been no material changes to our critical accounting policies and estimates from the information provided in our Annual Report on Form 10-K for the fiscal year ended March 26, 2022.

 

RESULTS OF OPERATIONS

 

Executive Summary

 

During our third quarter of fiscal year 2023, we had consolidated revenue of $57.4 million. This represented an increase of $6.5 million or 12.8% versus the third quarter of fiscal year 2022. This increase was primarily due to the recently completed acquisitions, strong demand in our Service segment’s highly-regulated end markets and improved market conditions in our Distribution segment, especially rentals.

 

Our third quarter of fiscal year 2023 gross profit was $16.4 million. This was an increase of $2.8 million or 20.3% versus the third quarter of fiscal year 2022. In addition, consolidated gross margin was 28.6%, an increase of 180 basis points, versus the third quarter of fiscal year 2022. This increase was largely the result of operating leverage on our fixed costs and accretive gross margins from our rental business.

 

Total operating expenses were $13.2 million in the third quarter of fiscal year 2023, an increase of $2.0 million or 17.4% when compared to the prior year third quarter. Included in operating expenses during the third quarter of fiscal year 2023 were incremental operating expenses related to the acquisitions of Alliance, e2b and Complete Calibrations, investments in technology and higher incentive-based employee costs due to higher sales. As a percentage of total revenue, operating expenses were 23.1% in the third quarter of fiscal year 2023, up 90 basis points from 22.2% in the third quarter of fiscal year 2022. Operating income was $3.2 million, an increase of $0.8 million, or 34.0% and operating margin increased from 4.6% to 5.5% in the third quarter of fiscal year 2023.

 

Net income was $1.6 million for each of the third quarter of fiscal year 2023 and fiscal year 2022.  The difference between higher operating income and flat net income compared to the prior period is due to higher interest expense.

 

 

The following table presents, for the third quarter of fiscal year 2023 and fiscal year 2022, the components of our Consolidated Statements of Income:

 

   

(Unaudited)

   

(Unaudited)

 
   

Third Quarter Ended

   

Nine Months Ended

 
   

December 24,

   

December 25,

   

December 24,

   

December 25,

 
   

2022

   

2021

   

2022

   

2021

 

As a Percentage of Total Revenue:

                               

Service Revenue

    62.7 %     59.4 %     62.4 %     58.6 %

Distribution Sales

    37.3 %     40.6 %     37.6 %     41.4 %

Total Revenue

    100.0 %     100.0 %     100.0 %     100.0 %
                                 

Gross Profit Percentage:

                               

Service Gross Profit

    30.0 %     29.7 %     31.5 %     31.4 %

Distribution Gross Profit

    26.2 %     22.5 %     25.4 %     23.2 %

Total Gross Profit

    28.6 %     26.8 %     29.2 %     28.0 %
                                 

Selling, Marketing and Warehouse Expenses

    11.5 %     10.0 %     10.9 %     10.1 %

General and Administrative Expenses

    11.6 %     12.2 %     12.1 %     11.4 %

Total Operating Expenses

    23.1 %     22.2 %     23.0 %     21.5 %
                                 

Operating Income

    5.5 %     4.6 %     6.2 %     6.5 %
                                 

Interest and Other Expense, net

    1.8 %     0.2 %     1.0 %     0.4 %
                                 

Income Before Income Taxes

    3.7 %     4.4 %     5.2 %     6.1 %

Provision for Income Taxes

    0.9 %     1.2 %     1.0 %     0.5 %
                                 

Net Income

    2.8 %     3.2 %     4.2 %     5.6 %

 

Third Quarter Ended December 24, 2022 COMPARED TO Third Quarter Ended December 25, 2021 (dollars in thousands):

 

Revenue:

 

   

Third Quarter Ended

   

Change

 
   

December 24,

   

December 25,

                 
   

2022

   

2021

   

$

   

%

 

Revenue:

                               

Service

  $ 35,977     $ 30,237     $ 5,740       19.0 %

Distribution

    21,425       20,665       760       3.7 %

Total

  $ 57,402     $ 50,902     $ 6,500       12.8 %

 

Total revenue was $57.4 million, an increase of $6.5 million, or 12.8%, in our fiscal year 2023 third quarter compared to the prior fiscal year third quarter.

 

Service revenue, which accounted for 62.7% and 59.4% of our total revenue in the third quarter of fiscal years 2023 and 2022, respectively, increased 19.0% from the third quarter of fiscal year 2022 to the third quarter of fiscal year 2023. This year-over-year increase included $2.1 million in revenue from acquisitions, and also included organic revenue growth of 12.0% driven by improvement in end market conditions and continued market share gains.

 

 

Our fiscal years 2023 and 2022 Service revenue growth, in relation to prior fiscal year quarter comparisons, was as follows:

 

   

FY 2023

   

FY 2022

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Service Revenue Growth

    19.0 %     19.4 %     22.9 %     19.6 %     22.1 %     20.4 %     20.0 %

 

The growth in Service segment revenue during the third quarter of fiscal year 2023 versus the third quarter of fiscal year 2022 reflected both organic growth and acquisitions.

 

Within any fiscal year, while we add new customers, we also have customers from the prior fiscal year whose service orders may not repeat for any number of factors. Among those factors are variations in the timing of periodic calibrations and other services, customer capital expenditures and customer outsourcing decisions. Because the timing of Service segment orders can vary on a quarter-to-quarter basis, we believe trailing twelve-month information provides a better indication of the progress of this segment.

 

The following table presents the trailing twelve-month Service segment revenue for the first, second and third quarter of fiscal year 2023 and each quarter in fiscal year 2022 as well as the trailing twelve-month revenue growth as a comparison to that of the prior fiscal year period:

 

   

FY 2023

   

FY 2022

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Trailing Twelve-Month:

                                                       

Service Revenue

  $ 139,787     $ 134,047     $ 128,324     $ 122,005     $ 116,315     $ 110,854     $ 105,864  

Service Revenue Growth

    20.2 %     20.9 %     21.2 %     20.5 %     19.5 %     17.2 %     13.1 %

 

Our strategy has been to focus our investments in the core electrical, temperature, pressure, physical/dimensional and radio frequency/microwave calibration disciplines. We expect to subcontract approximately 13% to 15% of our Service revenue to third-party vendors for calibration beyond our chosen scope of capabilities. We continually evaluate our outsourcing needs and make capital investments, as deemed necessary, to add more in-house capabilities and reduce the need for third-party vendors. Capability expansion through business acquisitions is another way that we seek to reduce the need for outsourcing. The following table presents the source of our Service revenue and the percentage of Service revenue derived from each source for the first, second and third quarter of fiscal year 2023 and for each quarter during fiscal year 2022:

 

   

FY 2023

   

FY 2022

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Percent of Service Revenue:

                                                       

In-House

    86.2 %     86.2 %     85.4 %     85.4 %     84.1 %     83.2 %     83.1 %

Outsourced

    12.6 %     12.6 %     13.2 %     13.1 %     14.4 %     15.3 %     15.4 %

Freight Billed to Customers

    1.2 %     1.2 %     1.4 %     1.5 %     1.5 %     1.5 %     1.5 %
      100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %

 

 

Our Distribution sales accounted for 37.3% of our total revenue in the third quarter of fiscal year 2023 and 40.6% of our total revenue in the third quarter of fiscal year 2022. During the third quarter of fiscal year 2023, Distribution segment sales showed an increase of 3.7% or $0.8 million to $21.4 million. This increase was primarily due to strong demand for rental orders.

 

Our fiscal years 2023 and 2022 Distribution sales growth, in relation to prior fiscal year quarter comparisons, was as follows:

 

   

FY 2023

   

FY 2022

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Distribution Sales Growth

    3.7 %     1.6 %     2.7 %     7.2 %     7.2 %     22.2 %     27.0 %

 

The change in the third quarter of fiscal year 2023 versus the third quarter of fiscal year 2022 for the Distribution segment reflected organic growth.

 

Distribution sales orders include orders for instruments that we routinely stock in our inventory, customized products, and other products ordered less frequently, which we do not stock. Backorders are the total dollar value of orders received for which revenue has not yet been recognized. Pending product shipments are primarily backorders, but also include products that are requested to be calibrated in our service centers prior to shipment, orders required by the customer to be shipped complete or at a future date, and other orders awaiting final credit or management review prior to shipment. Management uses pending product shipments and backorders as measures of our future business performance and financial performance within the distribution segment.

 

Our total pending product shipments at the end of the third quarter of fiscal year 2023 were $9.5 million, an increase of $0.6 million versus the end of the third quarter of fiscal year 2022 and an increase of $1.8 million since March 26, 2022. The year-over-year increase in pending product shipments and backorders was a result of the disruption to the supply of products as well as increased orders.

 

The following table presents our total pending product shipments and the percentage of total pending product shipments that were backorders at the end of the first, second and third quarter of fiscal year 2023 and each quarter of fiscal year 2022:

 

   

FY 2023

   

FY 2022

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Total Pending Product Shipments

  $ 9,543     $ 9,116     $ 9,034     $ 7,747     $ 8,943     $ 7,707     $ 8,272  

% of Pending Product

                                                       

Shipments that were Backorders

    78.4 %     80.8 %     78.1 %     83.2 %     80.5 %     77.2 %     77.5 %

 

Gross Profit:

 

   

Third Quarter Ended

   

Change

 
   

December 24,

   

December 25,

                 
   

2022

   

2021

   

$

   

%

 

Gross Profit:

                               

Service

  $ 10,793     $ 8,983     $ 1,810       20.1 %

Distribution

    5,607       4,653       954       20.5 %

Total

  $ 16,400     $ 13,636     $ 2,764       20.3 %

 

Total gross profit for the third quarter of fiscal year 2023 was $16.4 million, an increase of $2.8 million or 20.3% versus the third quarter of fiscal year 2022. Total gross margin was 28.6% in the third quarter of fiscal year 2023, up from 26.8% in the third quarter of fiscal year 2022, a 180 basis point increase.

 

Service gross profit in the third quarter of fiscal year 2023 increased $1.8 million, or 20.1%, from the third quarter of fiscal year 2022. Service gross margin was 30.0% in the third quarter of fiscal year 2023, a 30 basis point increase versus the third quarter of fiscal year 2022. This increase in gross margin was the result of improved productivity offset by increased start-up costs from new client-based lab implementations.

 

 

The following table presents the quarterly historical trend of our Service gross margin as a percent of Service revenue:

 

   

FY 2023

   

FY 2022

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Service Gross Margin

    30.0 %     32.6 %     32.0 %     33.1 %     29.7 %     32.9 %     31.8 %

 

Our Distribution gross margin includes net sales less the direct cost of inventory sold and the direct costs of equipment rental revenues, primarily depreciation expense for the fixed assets in our rental equipment pool, as well as the impact of rebates and cooperative advertising income we receive from vendors, freight billed to customers, freight expenses and direct shipping costs. In general, our Distribution gross margin can vary based upon the mix of products sold, price discounting, and the timing of periodic vendor rebates offered and cooperative advertising programs from suppliers.

 

The following table reflects the quarterly historical trend of our Distribution gross margin as a percent of Distribution sales:

 

   

FY 2023

   

FY 2022

 
   

Q3

   

Q2

   

Q1

   

Q4

   

Q3

   

Q2

   

Q1

 

Distribution Gross Margin

    26.2 %     24.9 %     25.0 %     24.5 %     22.5 %     23.5 %     23.6 %

 

Distribution segment gross margin was 26.2% in the third quarter of fiscal year 2023 versus 22.5% in the third quarter of fiscal year 2022, a 370 basis point increase. The increase in segment gross margin was primarily due to a favorable mix of higher margin products sold and rented.

 

Operating Expenses:

 

   

Third Quarter Ended

   

Change

 
   

December 24,

   

December 25,

                 
   

2022

   

2021

   

$

   

%

 

Operating Expenses:

                               

Selling, Marketing and Warehouse

  $ 6,595     $ 5,051     $ 1,544       30.6 %

General and Administrative

    6,642       6,224       418       6.7 %

Total

  $ 13,237     $ 11,275     $ 1,962       17.4 %

 

Total operating expenses were $13.2 million in the third quarter of fiscal year 2023 versus $11.3 million during the third quarter of fiscal year 2022. The year-over-year increase in selling, marketing and warehouse expenses is due to increased expenses related to recent acquisitions, especially acquisition related amortization expense, and higher incentive-based employee costs due to higher sales. The increase in general and administrative expenses includes incremental expenses related to acquired companies, increased payroll costs for new employees and continued investments in technology.

 

As a percentage of total revenue, operating expenses were 23.1% in the third quarter of fiscal year 2023 and 22.2% in the third quarter of fiscal year 2022, an increase of 90 basis points.

 

Income Taxes:

 

   

Third Quarter Ended

   

Change

 
   

December 24,

   

December 25,

                 
   

2022

   

2021

   

$

   

%

 

Provision for Income Taxes

  $ 523     $ 596     $ (73 )     (12.2 )%

 

Our effective tax rate for the third quarter of fiscal years 2023 and 2022 was 24.6% and 26.8%, respectively. The decrease in the tax provision is due to the mix of net income by country. Our quarterly provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in each of the third quarter of fiscal years 2023 and 2022 was less than $0.1 million.

 

 

Net Income:

 

   

Third Quarter Ended

   

Change

 
   

December 24,

   

December 25,

                 
   

2022

   

2021

   

$

   

%

 

Net Income

  $ 1,601     $ 1,629     $ (28 )     (1.7 )%

 

Net income for the third quarter of fiscal year 2023 was flat compared to the third quarter of fiscal year 2022.  This is primarily due to higher operating income offset by increased interest expense.

 

Adjusted EBITDA:

 

In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation expense, acquisition related transaction expenses, non-cash loss on sale of building, and restructuring expense), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.

 

Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

 

   

Third Quarter Ended

 
   

December 24,

   

December 25,

 
   

2022

   

2021

 

Net Income

  $ 1,601     $ 1,629  

+ Interest Expense

    726       194  

+ Other (Income) / Expense

    313       (58 )

+ Tax Provision

    523       596  

Operating Income

  $ 3,163     $ 2,361  

+ Depreciation & Amortization

    2,824       2,368  

+ Transaction Expense

    96       55  

+ Other Income / (Expense)

    (313 )     58  

+ Noncash Stock Compensation

    815       624  

Adjusted EBITDA

  $ 6,585     $ 5,466  

 

Total Adjusted EBITDA for the third quarter of fiscal year 2023 was $6.6 million, an increase of $1.1 million or 20.5% versus the third quarter of fiscal year 2022. As a percentage of revenue, Adjusted EBITDA increased to 11.5% for the third quarter of fiscal year 2023 from 10.7% for the third quarter of fiscal year 2022. The increase in Adjusted EBITDA during the third quarter of fiscal year 2023 was primarily driven by the increase in depreciation and amortization expense and interest expense.

 

 

Adjusted Diluted Earnings Per Share:

 

In addition to reporting Diluted Earnings Per Share, a GAAP measure, we present Adjusted Diluted Earnings Per Share (net income plus acquisition related amortization expense, acquisition related transaction expenses, acquisition related stock-based compensation, acquisition amortization of backlog and restructuring expense, on a diluted per share basis), which is a non-GAAP measure. Our management believes Adjusted Diluted Earnings Per Share is an important measure of our operating performance because it provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

 

Adjusted Diluted Earnings Per Share is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of Diluted Earnings Per Share and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted Diluted Earnings Per Share, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

 

   

Third Quarter Ended

 
   

December 24,

   

December 25,

 
   

2022

   

2021

 

Net Income

  $ 1,601     $ 1,629  

+ Amortization of Intangible Assets

    1,180       947  

+ Acquisition Amortization of Backlog

    -       300  

+ Acquisition Deal Costs

    254       293  

+ Income Tax Effect @ 25%

    (359 )     (385 )

Adjusted Net Income

    2,676       2,784  
                 

Average Diluted Shares Outstanding

    7,666       7,653  
                 

Diluted Earnings Per Share – GAAP

  $ 0.21     $ 0.21  
                 

Adjusted Diluted Earnings Per Share

  $ 0.35     $ 0.36  

 

 

nine months ended December 24, 2022 COMPARED TO nine months ended December 25, 2021:

 

Revenue:

 

   

Nine Months Ended

   

Change

 

(dollars in thousands)

 

December 24,

   

December 25,

                 
   

2022

   

2021

   

$

   

%

 

Revenue:

                               

Service

  $ 105,120     $ 87,338     $ 17,782       20.4 %

Distribution

    63,382       61,741       1,641       2.7 %

Total

  $ 168,502     $ 149,079     $ 19,423       13.0 %

 

Service revenue, which accounted for 62.4% of our total revenue during the first nine months of fiscal year 2023 and 58.6% of our total revenue during the first nine months of fiscal year 2022, increased $17.8 million, or 20.4%, from the first nine months of fiscal year 2022 compared to the first nine months of fiscal year 2023. This year-over-year increase reflected increased demand from the life sciences and other highly-regulated end markets and included $9.0 million of incremental revenue from acquisitions.

 

Our Distribution sales accounted for 37.6% and 41.4% of our total revenue in the first nine months of fiscal years 2023 and 2022, respectively. For the first nine months of fiscal year 2023, Distribution sales increased $1.6 million, or 2.7%, compared to the first nine months of fiscal year 2022. This increase in revenue was due to increased orders in the first nine months of fiscal year 2023 and strong demand for rental orders.

 

 

Gross Profit:

 

   

Nine Months Ended

   

Change

 

(dollars in thousands)

 

December 24,

   

December 25,

                 
   

2022

   

2021

   

$

   

%

 

Gross Profit:

                               

Service

  $ 33,115     $ 27,447     $ 5,668       20.7 %

Distribution

    16,090       14,320       1,770       12.4 %

Total

  $ 49,205     $ 41,767     $ 7,438       17.8 %

 

Total gross profit for the first nine months of fiscal year 2023 was $49.2 million, an increase of $7.4 million or 17.8% versus the first nine months of fiscal year 2022. Total gross margin was 29.2%, a 120 basis points increase compared to 28.0% in the first nine months of fiscal year 2022. This increase in gross margin was primarily due to operating leverage on our fixed cost base in the Service segment and a favorable mix of products sold and rented in the Distribution segment.

 

Operating Expenses:

 

   

Nine Months Ended

   

Change

 

(dollars in thousands)

 

December 24,

   

December 25,

                 
   

2022

   

2021

   

$

   

%

 

Operating Expenses:

                               

Selling, Marketing and Warehouse

  $ 18,315     $ 15,022     $ 3,293       21.9 %

General and Administrative

  $ 20,497       17,117       3,380       19.7 %

Total

  $ 38,812     $ 32,139     $ 6,673       20.8 %

 

Total operating expenses for the first nine months of fiscal year 2023 were $38.8 million, an increase of $6.7 million or 20.8% versus the first nine months of fiscal year 2022. The year-over-year increase in selling, marketing and warehouse was due to increased expenses related to recent acquisitions, especially acquisition related amortization expense, and higher incentive-based employee costs due to higher sales. The increase in general and administrative expenses includes incremental expenses related to acquired companies, increased payroll costs from new employees and continued investments in technology.  As a percentage of total revenue, operating expenses during the first nine months of fiscal year 2023 were 23.0%, compared to 21.6% in the first nine months of fiscal year 2022, an increase of 140 basis points.

 

Provision for Income Taxes:

 

   

Nine Months Ended

   

Change

 

(dollars in thousands)

 

December 24,

   

December 25,

                 
   

2022

   

2021

   

$

   

%

 

Provision for Income Taxes

  $ 1,631     $ 715     $ 916       128.1 %

 

Our effective tax rates for the first nine months of fiscal years 2023 and 2022 were 18.8% and 7.9%, respectively. The increase in our tax rate is due to the decreased discrete tax benefits from share-based compensation activity. Our provision for income taxes is affected by discrete items that may occur in any given period but are not consistent from year to year. The discrete benefits related to share-based compensation activity in the first nine months of fiscal years 2023 and 2022 were $0.5 million and $1.7 million, respectively.

 

 

Net Income:

 

   

Nine Months Ended

   

Change

 
   

December 24,

   

December 25,

                 
   

2022

   

2021

   

$

   

%

 

Net Income

  $ 7,030     $ 8,332     $ (1,302 )     (15.6 )%

 

Net income for the first nine months of fiscal year 2023 was $7.0 million, a decrease of $1.3 million or 15.6% versus the first nine months of fiscal year 2022. The year over year decrease in net income was due higher operating income offset by higher operating expenses, higher interest expense and a higher provision for income taxes.

 

Adjusted EBITDA:

 

In addition to reporting net income, a GAAP measure, we present Adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization, non-cash stock compensation expense, acquisition related transaction expenses, non-cash loss on sale of building, and restructuring expense), which is a non-GAAP measure. Our management believes Adjusted EBITDA is an important measure of our operating performance because it allows management, investors and others to evaluate and compare the performance of our core operations from period to period by removing the impact of the capital structure (interest), tangible and intangible asset base (depreciation and amortization), taxes, stock-based compensation expense and other items, which is not always commensurate with the reporting period in which it is included. As such, our management uses Adjusted EBITDA as a measure of performance when evaluating our business segments and as a basis for planning and forecasting. Adjusted EBITDA is also commonly used by rating agencies, lenders and other parties to evaluate our credit worthiness.

 

Adjusted EBITDA is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted EBITDA, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

 

   

Nine Months Ended

 

(dollars in thousands)

 

December 24,

   

December 25,

 
   

2022

   

2021

 

Net Income

  $ 7,030     $ 8,332  

+ Interest Expense

    1,636       552  

+ Other Expense

    96       29  

+ Tax Provision

    1,631       715  

Operating Income

    10,393       9,628  

+ Depreciation & Amortization

    8,243       6,499  

+ Transaction Expense

    126       876  

+ Other Expense

    (96 )     (29 )

+ Noncash Stock Compensation

    2,757       1,681  

Adjusted EBITDA

  $ 21,423     $ 18,655  

 

During the first nine months of fiscal year 2023, Adjusted EBITDA was $21.4 million, an increase of $2.8 million or 14.8% versus the first nine months of fiscal year 2022. As a percentage of revenue, Adjusted EBITDA was 12.7% for the first nine months of fiscal year 2023 compared to 12.5% for the first nine months of fiscal year 2022. The increase in Adjusted EBITDA during the first nine months of fiscal year 2023 was primarily driven by the increase in interest expense, tax provision, depreciation and amortization expense and noncash stock compensation expense.

 

 

Adjusted Diluted Earnings Per Share:

 

In addition to reporting Diluted Earnings Per Share, a GAAP measure, we present Adjusted Diluted Earnings Per Share (net income plus acquisition related amortization expense, acquisition related transaction expenses, acquisition related stock-based compensation, acquisition amortization of backlog and restructuring expense, on a diluted per share basis), which is a non-GAAP measure. Our management believes Adjusted Diluted Earnings Per Share is an important measure of our operating performance because it provides a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

 

Adjusted Diluted Earnings Per Share is not a measure of financial performance under GAAP and is not calculated through the application of GAAP. As such, it should not be considered as a substitute or alternative for the GAAP measure of Diluted Earnings Per Share and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. Adjusted Diluted Earnings Per Share, as presented, may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.

 

 

   

Nine Months Ended

 
   

December 24,

   

December 25,

 
   

2022

   

2021

 

Net Income

  $ 7,030     $ 8,332  

+ Amortization of Intangible Assets

    3,411       2,296  

+ Acquisition Amortization of Backlog

    -       400  

+ Acquisition Deal Costs

    792       1,193  

+ Income Tax Effect @ 25%

    (1,051 )     (972 )

Adjusted Net Income

    10,182       11,249  
                 

Average Diluted Shares Outstanding

    7,644       7,599  
                 

Diluted Earnings Per Share – GAAP

  $ 0.92     $ 1.10  
                 

Adjusted Diluted Earnings Per Share

  $ 1.33     $ 1.48  

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

We expect that foreseeable liquidity and capital resource requirements will be met through anticipated cash flows from operations and borrowings from our revolving credit facility. We believe that these sources of financing will be adequate to meet our future requirements.

 

On July 7, 2021, we entered into the Second Amended and Restated Credit Facility Agreement (the “2021 Credit Agreement”) with Manufacturers and Traders Trust Company (“M&T”), that amended and restated in its entirety the Company’s Amended and Restated Credit Facility Agreement dated as of October 30, 2017, as amended by Amended and Restated Credit Facility Agreement Amendment 1 dated December 10, 2018 and Amended and Restated Credit Facility Agreement Amendment 2 (“Amendment Two”) dated May 18, 2020 (as amended, the “Prior Credit Agreement”).

 

The 2021 Credit Agreement increased the revolving credit commitment (the “Revolving Credit Commitment”) from $40.0 million to $80.0 million, with a letter of credit subfacility increased from $2.0 million to $10.0 million, and extended the term of the Revolving Credit Commitment to June 2026. The 2021 Credit Agreement amended the definition of Applicable Margin (formerly Applicable Rate under the Prior Credit Agreement), which is based upon our then current leverage ratio and is used to determine interest charges on outstanding and unused borrowings under the revolving credit facility; the amendments reduced the Applicable Margins payable at the two highest leverage ratio levels. The 2021 Credit Agreement also amended the definition of Permitted Acquisitions, that is, acquisitions which are permitted under, and may be financed with proceeds of, the revolving credit facility, including increasing the aggregate purchase price for acquisitions consummated in any fiscal year from $1.0 million to $65.0 million during fiscal year 2022 and $50.0 million during any subsequent fiscal year, and adding an aggregate purchase price of $40.0 million for acquisitions consummated at any time during the term of the 2021 Credit Agreement related to businesses with a principal place of business located in the United Kingdom or the European Union.

 

 

In addition, the 2021 Credit Agreement provides that, assuming no event of default, restricted payments up to $25.0 million (increased from $10.0 million in the Prior Credit Agreement) in the aggregate and $10.0 million (increased from $3.0 million in the Prior Credit Agreement) in any single fiscal year may be used by us to repurchase our shares and pay dividends. The 2021 Credit Agreement modified the leverage ratio and fixed charge coverage ratio covenants with which we are required to comply. The 2021 Credit Agreement also reduced the London Interbank Offered Rate (“LIBOR”) floor from 1.0% to 0.25% and included a mechanism for adoption of a different benchmark rate upon the discontinuation of LIBOR. The 2021 Credit Agreement also reduced the fixed interest rate on our term loan in the amount of $15.0 million (the “2018 Term Loan”) was reduced from 4.15% to 3.90%.

 

The 2021 Credit Agreement superseded in its entirety, the Prior Credit Agreement. Amendment Two to the Prior Credit Agreement had previously extended the term of the revolving credit facility to October 20, 2022 and increased the revolving credit commitment to $40.0 million.

 

Amendment Two had modified the definition of the applicable rate used to determine interest charges on outstanding and unused borrowings under the revolving credit facility and it amended the definition of permitted acquisitions to amend borrowings available under the revolving credit facility for acquisitions. In addition, Amendment Two had amended the definition of restricted payments to exclude amounts up to $2.5 million during each fiscal year used to pay certain employee tax obligations associated with share-based payment and stock option activity, and modified certain restrictions to our ability to repurchase our shares and pay dividends. Amendment Two also had modified the leverage ratio and fixed charge coverage ratio covenants with which we were required to comply and limited capital expenditures to $5.5 million for fiscal year 2021. Amendment Two also had established a LIBOR floor of 1.0% and included a mechanism for adoption of a different benchmark rate in the event LIBOR was discontinued.

 

As of December 24, 2022, $80.0 million was available under the revolving credit facility, of which $42.2 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. During the first nine months of fiscal year 2023 and 2022, we used $8.3 million and $20.9 million, respectively, for business acquisitions.

 

As of December 24, 2022, $7.0 million was outstanding on the 2018 Term Loan, of which $2.2 million was included in current liabilities on the Consolidated Balance Sheets with the remainder included in long-term debt. The 2018 Term Loan requires total repayments (principal plus interest) of $0.2 million per month through December 2025.

 

Pursuant to the Prior Credit Agreement, we were required to comply with a fixed charge ratio covenant and a leverage ratio covenant, which were modified by the 2021 Credit Agreement. The allowable leverage ratio under the Prior Credit Agreement for the first quarter of fiscal year 2022 was a maximum multiple of 4.0 of total debt outstanding compared to EBITDA and non-cash stock-based compensation expense for the preceding four consecutive fiscal quarters. The Prior Credit Agreement also had provided that the trailing twelve-month pro forma EBITDA of an acquired business was included in the allowable leverage calculation. After the first quarter of fiscal year 2022, pursuant to the 2021 Credit Agreement, the allowable leverage ratio is a maximum multiple of 3.0. We were in compliance with all loan covenants and requirements during the third quarter of fiscal year 2023. Our leverage ratio, as defined in the 2021 Credit Agreement, was 1.66 at December 24, 2022, compared with 1.74 at March 26, 2022

 

Interest on the revolving credit facility continues to accrue, at our election, at either the variable one-month LIBOR or a fixed rate for a designated period at the LIBOR corresponding to such period (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods), in each case, plus a margin. Interest on outstanding borrowings under the 2018 Term Loan accrued at a fixed rate of 4.15% during the first quarter of fiscal year 2022 and accrue at a fixed rate of 3.90% during the second quarter of fiscal year 2022 and over the term of the loan for subsequent periods. Unused fees accrue based on the average daily amount of unused credit available on the revolving credit facility. Interest rate margins and unused fees are determined on a quarterly basis based upon our calculated leverage ratio.

 

 

Cash Flows: The following table is a summary of our Consolidated Statements of Cash Flows (dollars in thousands):

 

 

Nine Months Ended

 
 

December 24,

 

December 25,

 
 

2022

 

2021

 

Cash Provided by (Used in):

           

Operating Activities

$ 13,975   $ 12,378  

Investing Activities

$ (15,445 ) $ (26,759 )

Financing Activities

$ 782   $ 16,900  

 

Operating Activities: Net cash provided by operations was $14.0 million during the first nine months of fiscal year 2023 compared to $12.4 million of net cash provided by operating activities during the first nine months of fiscal year 2022. The year-over-year increase in cash provided by operations was primarily the result of changes in net working capital (defined as current assets less current liabilities). The significant working capital fluctuations were as follows:

 

 

Receivables: Accounts receivable decreased $2.0 million during the first nine months of fiscal year 2023 inclusive of $0.7 million of accounts receivable acquired during the period. During the first nine months of fiscal year 2022, accounts receivable increased by a net amount of $0.8 million inclusive of $2.6 million of accounts receivable acquired during the period. The year-over-year variation reflects changes in the timing of collections. The following table illustrates our “days sales outstanding” as of December 24, 2022 and December 25, 2021 (dollars in thousands):

 

   

December 24,

   

December 25,

 
   

2022

   

2021

 

Net Sales, for the last two fiscal months

  $ 40,088     $ 34,743  

Accounts Receivable, net

  $ 37,702     $ 34,702  

Days Sales Outstanding

    59       63  

 

 

Inventory: Our inventory strategy includes making appropriate large quantity, high dollar purchases with key manufacturers for various reasons, including maximizing on-hand availability of key products, expanding the number of SKU’s stocked in anticipation of customer demand, reducing backorders for products with long lead times and optimizing vendor purchase and sales volume discounts. As a result, inventory levels may vary from quarter-to-quarter based on the timing of these large orders in relation to our quarter end. Our inventory balance increased $4.2 million during the first nine months of fiscal year 2023. Our inventory balance increased by $2.2 million during the first nine months of fiscal year 2022.

 

 

Accounts Payable: Changes in accounts payable may or may not correlate with changes in inventory balances at any given quarter end due to the timing of vendor payments for inventory, as well as the timing of payments for outsourced Service vendors and capital expenditures.

 

Accounts payable decreased $0.3 million during the first nine months of fiscal year 2023 inclusive of $0.1 million of accounts payable acquired during the period.  Accounts payable increased $0.7 million during the first nine months of fiscal year 2022. The variances are largely due to the timing of inventory and capital expenditures and other payments in the respective periods.

 

 

Accrued Compensation and Other Current Liabilities: Accrued compensation and other current liabilities include, among other things, amounts paid to employees for non-equity performance-based compensation. At the end of any particular period, the amounts accrued for such compensation may vary due to many factors including, but not limited to, changes in expected performance levels, the performance measurement period, and timing of payments to employees.

 

During the first nine months of fiscal year 2023, accrued compensation and other current liabilities decreased by $2.4 million. During the first nine months of fiscal year 2022, accrued compensation and other current liabilities decreased by $1.1 million. The change from the first nine months of fiscal year 2022 was largely due to the annual payment of incentive based compensation accruals.

 

 

Income Taxes Payable: In any given period, net working capital may be affected by the timing and amount of income tax payments. During the first nine months of fiscal year 2023 the net income tax receivable decreased by $0.8 million. During the first nine months of fiscal year 2022, income taxes payable decreased by $0.4 million. The year-over-year difference is due to timing of income tax payments.

 

 

Investing Activities: During the first nine months of fiscal year 2023, we invested $7.1 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and our rental business.

 

During the first nine months of fiscal year 2022, we invested $5.9 million in capital expenditures that was used primarily for customer-driven expansion of Service segment capabilities and our rental business.

 

During the first nine months of fiscal year 2023, we used $8.3 million for business acquisitions. During the first nine months of fiscal year 2022, we used $20.9 million for business acquisitions.

 

During each of the first nine months of fiscal year 2023 and fiscal year 2022, no contingent consideration or other holdback amounts were paid related to business acquisitions.

 

Financing Activities: During the first nine months of fiscal year 2023, $2.3 million was borrowed from our revolving line of credit and $0.5 million in cash was generated from the issuance of common stock. In addition, we used $1.6 million for scheduled repayments of our term loan and $0.4 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in fiscal year 2023, which are shown as a repurchase of shares of our common stock.

 

During the first nine months of fiscal year 2022, $22.8 million was borrowed from our revolving line of credit and $1.4 million in cash was generated from the issuance of common stock. In addition, we used $1.6 million for scheduled repayments of our term loan and $5.6 million for the “net” awarding of certain share awards to cover employee tax-withholding obligations for share award and stock option activity in fiscal year 2022, which are shown as a repurchase of shares of our common stock.

 

OUTLOOK

 

We are pleased with the growth across all of our business channels including double-digit organic Service growth in our third quarter of fiscal 2023. We expect our unique value proposition will continue to drive a sustainable competitive advantage in the highly regulated markets that we serve, particularly the Life Science and Aerospace and Defense markets.

 

We are confident our work around differentiation, including Nexa's service tracks and consulting platform, will foster continued organic revenue growth.  Driven by recurring revenue streams and regulation, we expect our Service segment to outperform through various economic cycles.

 

Our acquisition pipeline is very active. Acquisitions, which have generated compelling returns throughout fiscal year 2023, will continue to be an important component of Service growth. In addition, in both the fourth quarter of fiscal year 2023 and fiscal year 2024, we expect organic Service revenue growth to remain in the high-single digit range. We also expect gross margin improvement to continue in those periods as a by-product of both growth and successful execution of various ongoing productivity enhancement programs.

 

We expect our income tax rate to range between 21% and 23% for full fiscal year 2023. This estimate includes Federal, various state, Canadian and Irish income taxes and reflects the discrete tax accounting associated with share-based payment awards.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

INTEREST RATES

 

Our exposure to changes in interest rates results from our borrowing activities. In the event interest rates were to move by 1%, our yearly interest expense would increase or decrease by approximately $0.4 million assuming our average borrowing levels remained constant. As of December 24, 2022, $80.0 million was available under our revolving credit facility, of which $42.2 million was outstanding and included in long-term debt on the Consolidated Balance Sheets. As described above under “Liquidity and Capital Resources,” we also have a $15.0 million (original principal) term loan. The 2018 Term Loan is considered a fixed interest rate loan. As of December 24, 2022, $7.0 million was outstanding on the 2018 Term Loan and was included in long-term debt and current portion of long-term debt on the Consolidated Balance Sheets. The 2018 Term Loan requires total (principal and interest) repayments of $0.2 million per month.

 

 

 

At our option, we borrow from our revolving credit facility at the variable one-month LIBOR or at a fixed rate for a designated period at the LIBOR corresponding to such period (subject to a 1% floor during the first quarter of fiscal year 2022 and a 0.25% floor for subsequent periods), in each case, plus a margin. Our interest rate margin is determined on a quarterly basis based upon our calculated leverage ratio. Our interest rate during the first nine months of fiscal year 2023 for our revolving credit facility ranged from 1.6% to 6.0%. Interest on outstanding borrowings of the 2018 Term Loan accrued at a fixed rate of 4.15% over the term of the loan during the first quarter of fiscal year 2022 and 3.90% over the term of the loan for subsequent periods. Our revolving credit facility includes a mechanism for adoption of a different benchmark rate upon the discontinuation of LIBOR. On December 24, 2022, we had no hedging arrangements in place for our revolving credit facility to limit our exposure to upward movements in interest rates.

 

FOREIGN CURRENCY

 

Approximately 90% of our total revenues for each of the first nine months of fiscal year 2023 and 2022 were denominated in U.S. dollars, with the remainder denominated in Canadian dollars and Euros. A 10% change in the value of the Canadian dollar to the U.S. dollar and the Euro to the U.S. dollar would impact our revenue by approximately 1%. We monitor the relationship between U.S. and Canadian currencies and the U.S. dollar and the Euro on a monthly basis and adjust sales prices for products and services sold in Canadian dollars or Euros as we believe to be appropriate.

 

We continually utilize short-term foreign exchange forward contracts to reduce the risk that future earnings denominated in Canadian dollars would be adversely affected by changes in currency exchange rates. We do not apply hedge accounting and therefore the net change in the fair value of the contracts, which totaled a gain of $0.3 million and less than $0.1 million during the first nine months of each of the fiscal years 2023 and 2022, respectively, was recognized as a component of Interest and Other Expense, net in the Consolidated Statements of Income. The change in the fair value of the contracts is offset by the change in fair value on the underlying accounts receivables denominated in Canadian dollars being hedged. On December 24, 2022, we had a foreign exchange contract, which matured in January 2023, outstanding in the notional amount of $3.0 million. The foreign exchange contract was renewed in January 2023 and continues to be in place. We do not use hedging arrangements for speculative purposes.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. Our principal executive officer and our principal financial officer evaluated our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of such date.

 

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting that occurred during the last fiscal quarter covered by this quarterly report (our third quarter of fiscal year 2023) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

INDEX TO EXHIBITS

 

Exhibit No.

 

Description

       

(31)

 

Rule 13a-14(a)/15d-14(a) Certifications

       
   

31.1*

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       
   

31.2*

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

       

(32)

 

Section 1350 Certifications

       
   

32.1**

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

       

(101)

 

Interactive Data File

       
101.INS*     Inline XBRL Instance Document
       
101.SCH*     Inline XBRL Taxonomy Extension Schema Document
       
101.CAL*     Inline XBRL Taxonomy Extension Calculation Linkbase Document
       
101.DEF*     Inline XBRL Taxonomy Extension Definition Linkbase Document
       
101.LAB*     Inline XBRL Taxonomy Extension Label Linkbase Document
       
101.PRE*     Inline XBRL Taxonomy Extension Presentation Linkbase Document
       
(104)     Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*

Exhibit filed with this report.

**

Exhibit furnished with this report.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  TRANSCAT, INC.  
     
     

Date: February 1, 2023

/s/ Lee D. Rudow

 
 

Lee D. Rudow

 
 

President and Chief Executive Officer

(Principal Executive Officer)

 
     
     

Date: February 1, 2023

/s/ Thomas L. Barbato

 
 

Thomas L. Barbato

 
 

Senior Vice President of Finance and Chief Financial Officer

(Principal Financial Officer)

 

 

 

34